Barrick Gold Hits Glacier, Investors Must Heed Growing Sector Risks

by: Emmet Kodesh

Barrick Gold (NYSE:ABX), the world's largest gold producer, has had a series of cost over-runs and delays in developing its mine at Pascua Lama on the border of Chile and Argentina. The issues in Chile climaxed this past week with an injunction barring inquiry about effects on a local glacier and neighboring communities. This latest and potentially very costly setback follows other problems Barrick has had with investments in developing nations. After reviewing these problems I will detail the current situation at Pascua Lama and discuss how it illumines the investment climate for miners and basic materials. This in turn affects your choices about sector allocation and global diversification.

On January 7, Pakistan's High Court voided a lease Barrick held equally with its Chilean partner Antofagasta Minerals to develop a copper and gold mine at Reko Diq in Baluchistan in southwestern Pakistan. This project was expected to yield 600,000 tons of copper and 250,000 ounces of gold / year but work stopped in 2011 after the local government refused to renew the consortium's mining lease. BHP Billiton (NYSE:BHP) had the initial 1993 lease but left the field to Barrick because of resource nationalism issues which seem to be growing by the month.

Blocking Barrick's work at Reko Diq does not seem to help anyone: Pakistan's mining technology wastes up to 80% of potential ore by primitive blasting techniques which could have been reformed by acquiring Barrick's methods. Moreover, its miners produce only marble and granite. Yet Pakistan preferred to quash the deal, lose its 25% share of the mine's production and its link to advanced mining technology. The self-destructive aspects of this decision were no solace to Barrick share holders and the reverberations are still being felt, amid more recent disasters with foreign governments and NGOs.

Barrick's problems typify those of the entire sector. In Mongolia, Rio Tinto (NYSE:RIO) and in Indonesia Freeport McMoran (NYSE:FCX) have faced political and even international NGO opposition in developing great mines. Even Australia, home to many mining companies and considered a mining-friendly venue has a Mineral Resource Rent Tax on iron ore, coal and petroleum profits that became active July 1, 2012. The confluence of politics, environmental concerns, regulatory and tax increases mix with the take-down of precious metals' prices and declining world growth and consumer liquidity which slow commodity production. The world seems to be slipping into a period of extractive clutching, depression and sterility.

But first let us consider the woes of Barrick which fell 8.53% April 12 on quadruple volume to a new secular low at $22.62/share. Its market cap has plunged 25% since 3Q 2012 to today's $25 billion, a major loss of liquidity. Although the problems have been priced in and analyst estimates remain nearly double the current price, sentiment has taken over and the situation is dire.

In February this year, Barrick took a $4.2 billion write-down of its Zambian copper mine at Lumwana which it had acquired from Equinox Minerals for $7.25 billion. This gave ABX a $3 billion loss for 4th Q 2012. The government of the Dominican has slammed Barrick about the labeling on its ore shipments from the mine at Pueblo Viejo, which it owns jointly with Gold Corp (NYSE:GG). President Danilo Medina contrasted Barrick's wealth (now much impaired) to poverty in Santo Domingo. The ore shipment was released four days later but the problems linger. Though Barrick has invested $4 billion in the Dominican apparently it isn't enough to satisfy political appetites whose nature is insatiable. These developments and a series of quarterly earnings disappointments have dropped Barrick's share price 45% since 3rd Q 2012.

Other blows for Barrick and its share holders have been cost over runs at Pascua Lama whose development expense in 2009 stood at $3 billion, grew to $4.7 billion last fall and early this year again was revised to the $8 - 8.5 billion range. The last straw may be recent reports that a Chilean court has halted work on the project which allegedly violates Chile's "Glacier Law." Chile has an election in the fall and some Chileans are demanding more royalties from miners. The situation has many analogies to the troubles in Mongolia of Rio Tinto and its majority-owned companies including Turquoise Hill (NYSE:TRQ), South Gobi Resources (OTC:SGQRF) and Entree Gold (NYSEMKT:EGI), which made new 52-week lows April 11 and 12.

I have discussed synergies between global NGOs ("non-governmental organizations"), resource nationalism and politics and their potential effects on the mining sector in an article entitled "NGOs Thwart Miners, Skew Sector Outlook." The damage to Barrick in Chile will be great if the High Court bans or curtails development. Pascua Lama is expected to produce 850k oz Au and 35 million oz Ag during each of its first five years of operation. It is an enormous source of wealth: 676 million oz Ag with an additional 185 million oz Ag in measured and indicated gold reserves. Streaming Company Silver Wheaton (NYSE:SLW) has contracted for 25% of this production with its characteristic low up-front payment that is hedged against default by ore from other Barrick properties and buy-out provisions in case Pascua Lama is not producing by late 2015. This now seems likely, as the injunction against it by the local court in Chiapo is headed for Chile's Supreme Court late in 2013 or early 2014.

A wild card unmentioned in any commentary I've seen on Chile's case against Barrick is two-plus years of protests against development at Pascua Lama by the global group Greenpeace. "You can't repair a glacier" sums up their sound bite on the issue. The indigenous people have been stirred to make demands and bring suit against Barrick by the "environmental" perspective they have learned. The term "climate change" also has been introduced to discussions of the perennially dry region in which the mine is being built. Pascua Lama is a political hot potato in Chile as the elections loom. Environmental concerns dovetail with a growing resource nationalism and taxes from debt-laden governments to suggest rough waters ahead for the mining sector.

These issues are political-economic and also cultural ones that affect us as people as well as investors and tax-payers. There are indeed major environmental problems in the world, some of which are worsened by "green" technologies or by fiscal policies meant to redress them. Better understanding helps us see the best decisions for investment, political policies and health. It is similar to knowing the facts about the "Affordable Care" Act which already damages wealth, interdicts profits, increases expense and will ravage health too. There is a destructive confluence against the clutch and grab of deficit-addicted governments that disgorge populist rhetoric, decreasing bank loans and increasing speculation and the resource nationalism that increases their impact. To thrive or just protect wealth requires highlighting this problematic confluence of policies and trends.

One would applaud a genuine concern for the purity of run-off from the glacier at Pascua Lama if it indeed supplies irreplaceable potable water for local communities and the issue is not about the pristine inviolability of every glacier on earth. But if this is a matter of selectively targeting one project or company to enforce the dogma of "climate change," a phenomenon as ancient as the world itself (see the list of scholarly comments here) than we have here an enormous loss of value and local prosperity (Chile is the world's largest exporter of copper). The situation then concerns the politics of impoverishment and sterility not health and natural growth.

Governments including judicial systems gain power by impoverishing independent companies. It is plain that environmental concerns are applied selectively, that is, politically. One of the worst ongoing environmental disasters in the world results from China's mining in its province of Inner Mongolia just a bit south of RIO's projects in Mongolia proper. China's generation of particulate matter and mercury pollution is well documented and extreme, causing 1.2 million premature deaths/year but "environmentalists" do little. As I have documented in researching the case for platinum group metals (NYSEARCA:PALL) and catalytic converters, investments that could ameliorate that problem, Chinese pollution is responsible not only for lethally hazardous air quality in China, Korea and Japan but on America's West coast.

For one to believe that environmental organizations and advocacy are politically neutral and concerned above all about the health of human beings one would want to see major attention directed at China to reduce its emissions of particulate matter, mercury (35% of world problem, see previous three links), sulfuric acid and other deadly toxins. What we see instead is selective outrage directed toward Western companies and seemingly aimed at stirring up local populations against them. So economic growth, profitability and health all decline.

Often the agenda seems meant not to protect but impoverish and de-populate. Where in the developing world, supposedly the engine of global growth should one invest when populist rhetoric, nationalism or NGOs may appear anywhere? The result is uncertainty akin to that arising from creation of debt currency and Central Bank manipulation of markets. Though many governmental policies intend to drive money to equities, they have created a climate that encourages increasingly defensive positions and thus a spiraling down of wealth and growth.

Seemingly selective concerns that crimp growth which depends on abundant and reliable energy also evince themselves in attention to the environmental ruin caused by wind turbines. Though inefficient in generating power the giant turbines are highly effective at killing millions of birds including rapidly diminishing species from Tasmania to Scotland to California (the golden eagle), osprey, whooping cranes, condors, geese and swans. Where is the outrage? Where are the headlines and lawsuits?

Similarly, many professed environmentalists promote the benefits of ethanol which harms engines (AAA has joined a suit against increased ethanol content), negates engine warranties and is energy inefficient. Worst of all, it distorts agricultural production away from wheat and corn for food and animal feed. All of this damages the economy, growth, profit and social sustainability that is the supposed goal. Corn-based fuel drives up costs of bread, meat, poultry, eggs, milk, cream, butter and causes food prices to soar in nations that have depended on cheap American agricultural goods. The upshot is "a rising risk of regulatory uncertainty," higher prices and hunger. In a vicious and tragic cycle, this distress leads to riots, more resource nationalism, attacks on wealth-producing companies and then poverty. The world is in an anti-development, anti-wealth death spiral of fiat justice, fake compassion and fiat currencies. In this cycle, defensive positions and exit points become increasingly important and thus I have emphasized consumer staples and health care while noting that these sectors (both up in Friday's sell-off) do not build economic basics.

Takeaways: the cyclonic-synergy of environmental concerns, resource nationalism, local politics and NGO animus against mining cautions against more than a 5% weighting in basic materials. Even though or perhaps because this sector is the base on which economic growth, abundance and wealth are built, it is a target for legal and political assault. As I suggested in my piece "NGOs Thwart Miners" cited and linked above, it is possible that this assault is part of an attack on sources of value that compete with fiat currencies and their inexorable drive toward a devalued and impoverished world. This in turn may be part of the eugenics or de-population agenda which has been the DOS of geopolitical - fiscal policies for a century.

There is abundant circumstantial evidence for this from lifestyle trends to an endless series of no-win wars of attrition since 1945, "the wars of the era of world peace" predicted by Spengler ninety-five years ago and on display in Korea, Vietnam, Angola, Mesopotamia and Afghanistan. In many areas of life, values, culture and relationships of every kind are being vitiated by "the concealed powers that wield the collective as an agent of violence." Economic growth, wealth, profits and happiness all suffer and are collapsing together: look at the plunging value the past three years of major shipping companies like Baltic Dry Shipping (NYSE:BALT) or construction giant Caterpillar (NYSE:CAT). Investment must adjust to it. Military - related companies like Lockheed (NYSE:LMT), up 43% in the past 28 months or Northrop Grumman (NYSE:NOC) up 140% since the 2009 low are as in tune with the times and "Health Care Providers."

One must underweight miners despite the fundamentals for precious and base metals and materials and their importance to construction, agriculture, technology and in the case of PMs as ballast for the rapidly disintegrating system of fiat currency that jolts markets higher, ravages fixed income and skews allocation. Depending on your ability to take a loss or endure volatility while waiting for recovery, consider reducing allocation in this sector. Do not begin with Barrick: its losses are priced in, 40% of its operations are in Nevada and it is continuing to shift to this jurisdiction. Notably, RIO is seeking to divest holdings in Mongolia (South Gobi) and Australia (Ivanhoe Mining). Its attempt to raise $13 billion is part of the sector's defensive re-positioning around its core holdings. South Gobi's 800 million metric tons of coal may go to China Aluminum (CHALCO) after all. Pollution will increase but, as noted, the macro situation is one of tragic irony.

An alternative view is articulated by Rick Rule who states that "fortunes will be made" on the capitulation-level sentiment in miners. Indeed we may be witnessing the "spasmodic downside action" he predicted March 10. I urge all readers to listen to his short interview linked above. Similarly, Zijin Mining Company and Sprott on March 20 formed a China-based $500 million exchange facility to trade in minerals and precious metals. While the case for miners is grim, the bullion outlook strengthens.

Sometimes, however, fundamentals and basic investing principles must bend to prevailing winds. "If you can't learn to smile as the wind sits you will catch cold shortly." The thesis for precious metals and mining is intact but the times and market-movers are against it. Those who can wait out the storm may do so: others must trim their positions in miners but hold your bullion. Ex-USD trade is growing quickly and the perceived safety of T-Bills will fail.

Aldous Huxley said in his last speech that "the controlling oligarchy" that "uses technology and psychology to make people consent to their servitude" would "remain undomesticated" and "in the end, they will run wild." We are living through the late stages of this prediction: we see it in markets untethered from deteriorating economic basics and devalued currencies to plans, already on the books in Canada, New Zealand, England and America to classify depositors as investors and take their assets in the event of bank failures. So trim your mining positions, diversify into a variety of currencies via Everbank as I have suggested and continue to run with this "ski jump market and eye the exits."

As I also have suggested, a mixed oil and gas, agriculture, agricultural nutrients and bullion play is an ideal thesis and those who have taken my suggestion to acquire Sprott Resource (OTCPK:SCPZF) have enjoyed its surge while the entire PM, mining, materials and shipping sectors have been battered. Remember land: in choosing between "Gold, Silver, Equities or a Farm" it seems an increasingly ideal defensive position along with consumer staples and a utilities, e.g. via Vanguard's ETFs (NYSEARCA:VDC) and (NYSEARCA:VPU). The storm for miners will not end soon: it is enmeshed in the death throes of the fiat system.

Disclosure: I am long OTCPK:SCPZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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